Effective Market Shares and Antitrust

Abstract

This article extends the single-market measure of market power to a multimarket setting in order to develop the concept of effective market share—what the market share of the hypothetical, single-market firm would have to be to exercise the same degree of market power as the actual, multimarket-dominant firm. This approach yields four main findings. First, traditional market power measures tend to overstate (understate) market power in the case of net complements (substitutes). Second, cost complementarities compound the effects of demand complementarities in tempering the dominant firm's market power. Third, the errors in measuring market power are asymmetric: policy makers are more likely to conclude that market power is present when it is absent than to conclude that market power is absent when it is present. Fourth, effective market shares facilitate more reliable inferences about market power and hence fewer errors in adjudicating merger and deregulation cases.